Most entrepreneurs will be familiar with the saying, ‘cash flow is king’ and being paid promptly for goods and services can be the difference between a thriving, or a dying, business. However, research by payments services company Bacs suggests that almost half (47%) of the UK’s small to medium sized enterprises (SMEs) are being paid late. With the average late payment debt now standing at £32,185, this equates to SMEs being owed a staggering £26.3 billion.

The effects of late payment

The knock-on effects of not being paid on time can be significant. Bacs found that 32% of SMEs who were paid late also admitted paying their own suppliers late. Furthermore, 12% also said that late payment impacted on their ability to pay staff.

A significant amount of time and resource is being diverted to chasing late payments. 42% of SMEs experiencing late payments spend up to four hours a week chasing debtors, with 18% spending up to £500 a month doing so. The Federation of Small Businesses believes that if businesses paid their suppliers on time, 50,000 business ‘deaths’ could be avoided each year. All this time and resource could achieve so much more if it could be directed towards growth, rather than chasing debt.

Changes on the horizon

This April, regulations come into force that mean large companies and limited liability partnerships will have to publicly report twice a year on their payment practices, including the average time it takes them to pay supplier invoices. The Department for Business, Energy and Industrial Strategy is also recruiting for the new role of small business commissioner. This post is one of the measures the government is introducing to try and tackle late payments and support smaller businesses.

So it looks like the government is taking the problem seriously, which is a step in the right direction. However, for businesses struggling today, there are immediate actions they can take to try to avoid late payments.

Five steps to help avoid late payments from customers

1. Credit check your customers

This applies to new and existing customers - do you know their current financial position? This can provide a good indicator of whether you want to do, or continue doing, business with them and on what terms. How much credit, if any, do you want to extend?

2. Agree clear payment terms

Knowing what payment terms are in place is key to managing cash fl ow and debt. When is payment due? What sanctions are in place in the event of overdue payment?

3. Invoice promptly

71% of businesses who claim not to have issues with late payments attribute this to robust invoicing practices. The longer it takes to invoice, the longer it will take to get paid, so why wait? Is it possible to send the invoice by email, for example, to avoid unnecessary delay?

4. Make payments easier for customers

Consider offering online payments or direct debits, where appropriate. The easier it is to make payment, the more likely it is that payment will be made promptly.

5. Monitor and chase debt

Keep a record of when payments are due. As soon as an invoice becomes overdue for payment, make contact with the customer. One in five businesses cite the reason most often given by customers for late payment is that the invoice has simply been forgotten, so a simple reminder may be enough to prompt payment. Furthermore, making contact with customers can also provide an early indication of issues which may be a barrier to payment.

When further action is needed

Unfortunately, sometimes even with excellent processes and follow up, legal steps need to be taken to recover debts that are owed. Our experienced, specialist debt recovery team acts for clients along the entire debt recovery process, from letters of demand through to the enforcement of court judgments, allowing our clients to concentrate on their businesses rather than chasing debts.

Prevention is always better than cure and concentrating on making sure your debtors pay their bills promptly is time well spent. However, should you find yourself amongst the 47% of SMEs currently suffering from late payment, please contact DMH Stallard for details about how we may be able to help you.